8 Powerful Ways Entrepreneurs Can Reduce Financial Risks

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As an entrepreneur, your income might not be as stable as an employee with a full-time job and predictable monthly pay. But that doesn’t mean you have to live a life of risk. It’s all about how you protect yourself.

8 Smart Protections for Savvy Entrepreneurs

Source:entrepreneurshipsecret.com

The life of an entrepreneur is often one of ups, downs, and instability. It can take years – even decades – to finally discover a rhythm. Along the way, it’s imperative that you do everything within your power to reduce financial risk. Here are some smart protections you can implement to get ahead:

  1. Diversify Your Revenue Stream

As an entrepreneur, operating on a single source of income is risky. All it takes is one little problem and your entire livelihood could disappear overnight. One of your first goals should be to diversify your revenue stream.

Diversifying your revenue stream could look like adding new product lines to your business, picking up a side job to supplement your income, or relying on a spouse to pick up another job to create some more breathing room in your household budget.

  1. Secure the Right Insurance Policies

Source:oewilson.com

When money is tight, insurance can seem like a luxury that you can’t afford. However, it’s actually a necessity that you can’t afford to do without. The right insurance policies will protect you from losses that you can’t afford to replace.

Consider policies like professional liability insurance, property insurance, product liability insurance, and a good umbrella policy. It’s also smart to look into disability insurance.

“Disability insurance protects your source of income if injury or illness limits your ability to work,” Breeze explains. “Also known as disability income insurance and income protection insurance, it is designed to replace a portion of your monthly earnings while you are disabled.”

The hope is that these policies – including disability insurance – will never kick in. However, if they’re ever needed, they can save you from financial despair.

  1. Develop Emergency Funds (Personal and Business)

Entrepreneurs often oscillate between periods of feast and famine. One way to protect yourself (and your companies) against periods of famine is to have emergency funds in place.

You should have a personal emergency fund, as well as business emergency funds for each company/venture that you run. These funds should ideally consist of three to six months of cash savings, which can be tapped in emergency situations to keep your household or businesses afloat.

  1. Secure Lines of Credit

A line of credit is a bank loan that looks and functions a lot like a credit card. You have a specified loan amount that you can use on an as-needed basis to fund approved purchases. And unlike a traditional loan where you pay interest on the total amount, a line of credit only requires you to pay interest on the funds you use.

Regardless of your personal opinions on debt, it’s wise to secure lines of credit for both your businesses and your household. Think of them as safety nets that will catch you should your income stop and your emergency funds run out.

  1. Reduce Debt

Source:newsday.com

While we recommend that you have secure lines of credit available, they should only be used when needed. Think of them as your last choice on a long list of better options.

Instead of actively seeking out debt, you can reduce your financial risk by paying down debt. By eliminating debt, you save money in the form of interest payments and limit the opportunity for creditors to come in and seize your assets.

You don’t have to pay down all of your debt in one fell swoop. Gradually chip away month after month – making extra premium payments whenever you can. (Make sure to read the fine print of your loan agreement to ensure there are no prepayment penalties.)

  1. Surround Yourself With Good Mentors and Consultants

There’s nothing wrong with being a solopreneur or running a small business where you call all the shots. However, any time there’s only one person in charge of finances, there’s a much greater risk that something could go wrong.

One of the best pieces of advice is to surround yourself with a team of mentors and consultants who are financially savvy and see things from different perspectives. This may include a mentor, business coach, and CPA.

  1. Read All Financial Statements

This is a practical yet important tip. No matter how much of a rhythm you’re in, make sure to always read your financial statements. This includes bills, quarterly reports, P&L statements, bank account statements, etc.

Errors happen with financial statements and, in many cases, are quite common. If you don’t go through them line by line with a fine-tooth comb, your expenses could be out of whack without you even knowing it.

  1. Always Have an Exit Strategy

Source:tweakyourbiz.com

You can’t always guarantee your business will be a success, but you can control how much downside you’re willing to absorb. It’s wise to always have an exit strategy for any business venture so that you can get out at the ideal time.

An exit strategy doesn’t always mean giving up on the business or selling it outright. It could mean selling a majority stake and retaining minority ownership. Or it could look like pivoting to another business model. The overarching point is that there have to be viable contingency plans in place.

Making the Most of Every Opportunity

These steps can feel boring and conservative at times, but you can think of it like building a foundation for a home. It’s not the most interesting part of the process – and most people will never see it – yet a strong foundation is required to support everything else.

Entrepreneurs don’t have the luxury of sitting back and waiting for things to unfold. Time is often of the essence. For those in precarious financial situations, acting swiftly to seize on opportunities isn’t always possible. But if you’ve done a good job of stabilizing your financial situation and limiting risk, you’ll find yourself in a much better position to take chances and pursue growth.

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